The Stock Market for Beginners
Millions of Americans own stock and the reason is simple. Shares of stock offer an opportunity to earn more on investments than a savings account or CD provides. With that opportunity comes some risk. Unlike bank deposits, the value of a stock is not insured by the government. This can make the stock market for beginners an intimidating prospect. The good news is that the basics of investing in stocks aren't hard to learn. By paying attention to these basics even the novice investor can expect to make a good return on his/her money in the long run.
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Identification
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When you buy stock you become part owner of the company. As an owner you can vote at stockholders' meetings, receive dividends, and share in the fortunes---good or bad---of the company. Stocks can be bought and sold in many ways, but the most common (and safest) are corporations listed on stock exchanges like the New York Stock Exchange. There are three principal ways of buying stocks. You can do so indirectly by purchasing shares in a mutual fund, invest through a broker, or in some cases buy stock directly from a company using a direct stock purchase plan.
Types
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A growth stock gives you an interest in a company that is focused on expanding and increasing its market share. These are usually the most interesting to beginning investors who want to increase their equity. You'll find growth stocks in any industry, but more in high technology and other fast-growing sectors. Income stocks like public utilities don't have as much growth potential, but are lower in risk and pay high dividends. Defensive stocks are industries that tend to retain value during economic downturns. Public utilities fall into this category along with discount retailers and suppliers of staple goods people must buy. Cyclical stocks are just the reverse. Industries like airlines and automobile manufacturing may be good long-term investments but often fare poorly in adverse economic conditions.
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Significance
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The key to successfully investing in the stock market for beginners is to carefully investigate a company. Virtually all major companies make their annual reports, balance sheets, and other information available in an "Investor Relations" section on their website. You can find independent analysis of companies through full service brokers and in publications like Kiplinger's and the Wall Street Journal. Examine the company's recent (3-5 year) earnings, growth, and stock performance and compare these to other companies in the industry. Examine the company's current condition using its balance sheet. A good prospect for investment will be positioned to continue good past performance.
Mutual Funds
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For many beginners in the stock market, researching and investing in individual stocks may not be the best option. An alternative is the mutual fund. This is a professionally managed stock portfolio. Before investing in a mutual fund, check its performance for the last few years and read the terms of the fund (in the fund prospectus). It's best to choose a no-load fund. This is a mutual fund that does not take an up-front fee (load) when you invest your money.
Brokerage Accounts
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To buy stocks through a broker, you must open a cash account. This is the basic brokerage account in which all transactions are settled (paid for) within 3 days. It's much like opening a checking account. Some additional information is required, including your net worth, income, and employer. A $1,000 minimum deposit is the norm. Most beginning investors opt for a full-service broker who offers investment advice, research tools, and analysis of different stocks. More experienced investors may choose a discount brokerage that does not offer these features but charges lower fees.
Direct Stock Purchase Plans
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Almost 2000 corporations offer an alternative to buying their stock through brokers. These are ideal for the beginning investor who has limited funds. A direct stock purchase plan (DSPP) requires only $250-$500 as an initial investment, which can usually be made in $50 monthly installments if debited from a checking account. Another advantage of DSPPs is that the transaction fees are very low for stock purchases ($1-3 per transaction plus 1 to 3 cents a share), although sales fees are higher ($10-30 plus 5-15 cents per share). You can find out if a company offers a DSPP by checking its Investor Relations WebPages.
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